Retirement Funds Required to Implement Default Arrangements

By the Shepstone & Wylie Employee Benefits Team

The final version of the Default Regulations to the Pension Funds Act, 1956, was signed into law by the Minister of Finance on 25 August 2017 and came into effect on 1 September 2017.  All funds registered before 1 March 2018 have 18 months within which to comply with the regulations, that is, by 1 March 2019.  The media statement issued by National Treasury together with the regulations explained that the regulations are “meant to improve the outcomes for members of retirement funds by ensuring that they get good value for their savings and retire comfortably”.

A high level overview of the obligations imposed on boards of trustees of retirement funds by the regulations is as follows:

1. Default investment portfolio(s) – boards of trustees of defined contribution pension and provident funds are required to implement one or more default investment portfolios into which a member’s retirement savings will automatically be invested upon joining the fund, unless the member opts out and chooses a different portfolio.  There are various requirements imposed in the regulations in relation to the structure and communication of the default investment portfolio/s.

2. Default preservation and portability – unless a member, who leaves a fund before retirement, instructs the fund to transfer their exit benefit to another fund or pay the benefit out in cash, the fund must retain/preserve the member’s benefit in the fund and convert the member to a “paid up” member.  Further, all funds must make provision to accept a new member’s “paid up” benefit from another fund.  There are also requirements on funds to produce a “paid up” membership certificate.

3. Annuity strategy – boards of trustees must devise an annuity strategy that provides retiring members with pension (annuity) options. This strategy may include “in-fund” annuities and “out-of-fund” annuities as well as living annuities. The retiring member will still be required to choose the annuity, but the availability of a “default offering” is expected to assist retiring members with this critical decision.

There is an emphasis throughout the Default Regulations on simplicity, cost-effectiveness and transparency in respect of all of these default arrangements. The implementation of the regulations will require amendments to be made to the rules of the funds and administrative arrangements.  Investment policy statements will also need to be reviewed.  Boards of trustees are strongly encouraged to obtain the necessary assistance and expertise in order to implement these arrangements well within the required time frame.

For more information on the above, please contact:

Samantha Davidson
Head of Employee Benefits
+27 31 575 7210

Carlyle Field
+27 31 575 7208